Critical Analysis Paper 2

Macy’s

Macy’s was recently showing signs of stress with a decline in revenue and profits. Macy’s is facing a 3.7% revenue decline from $28,105 million at the end of fiscal year 2015 to $27,079 million in fiscal year end 2016 and a 24% decline in profit margin from 9.9% in 2015 to 7.53% in 2016. In addition, Macy’s stock price has fallen more than 10% compared to the beginning of the year, and is planning to eliminating 6,200 positions and 100 stores around the U.S. We will conduct a situation analysis and provide a summary of the main causes of the problems.

Revenue problem

From 2016 to 2017, Macy’s has experienced a decline in sales due to multiple reasons. One possible cause of the decline in revenue is weak holiday sales. According to the National Retail Federation, the retail sales in 2017 are expected to increase by 3.6%, which is 0.6% higher compared to prior years (Kapner). Yet Macy’s has experienced a 2.1% decline on its comparable store basis in November and September from 2016 to 2017. According to Suzanne Kapner from The Wall Street Journal, the decline “would mark the eighth consecutive quarter that Macy’s sales have declined on that basis”, and May’s had to lower it’s per share earning goals due to the decline in holiday sales (Kapner).

Another possible cause of the revenue decline is the fierce competition in online sales. According to the Mastercard Spending Pulse, e-commerce spending was expected to increase 19% during the holidays, which was a drastic different number compare to the 4% growth in overall spending (Kapner). The e-commerce market grows rapidly, but Macy’s has fallen back in the online sales competition. According to Phil Wahba from Fortune Magazine, Macy’s was the 6th biggest e-commerce company in the U.S. and competitors like Amazon, Nordstrom, Kohl’s and JCPenney are pulling away most of the e-commerce market share.

The other possible causes of the decline in revenue are increasing competitors and changing fashion preferences of its customer. According to the Global Data, Macy’s is facing competitors like specialty stores, general merchandise stores, discount stores and outlets (Canadean). These competitors have made the retail business highly competitive, and new, rising low-price, fast-fastion retailers like Zara and H&M were made the competition even more fierce and made it harder for Macy’s to match the industry growth and maintain its market share.

The store closing plan was another possible cause of the revenue decline. According to Suzanne Kapner, the store closing has reduced $250 million in revenue for Macy’s in the 4th quarter of 2016 and is expected to decrease about $576 million in its 2017 revenue.

Profit problem

From 2016 to 2017, Macy’s has experienced a 24% decline in its profit margin, and this problem has a number of causes. One possible cause of the problem was the huge investment in e-commerce. Although 21% of Macy’s sales were come from online sales, this was after billions in investments. Because the huge expenses in free shipping, increasing free return rates, and increasing investment for distribution facilities, Macy’s operating costs has increased significantly form 90.1% of its sales in 2015 to 92.47% in 2016.

One of the possible causes of the profit decline is increasing labor cost. According to Global Data, Macy’s is facing increasing labor cost due to Macy’s expansion plan and increasing wages. Labor cost in the United States have been continually increasing. The high demand in the labor market, increasing federal minimum wages and higher full-time employee rate have made Macy’s labor cost higher which led to the decline in profits. The Fair Labor Standards Act (FLSA) stated, as of January 2016, the federal minimum were in the U.S. was $7.3 per hour. Although the federal rate was $7.3, each state has a different standard in terms of minimum hourly wages. For instance, from Maine/New Mexico to Washington D.C. wages range from $7.5 per hour to $10.5 per hour. Because Macy’s was a national corporation, these different minimum wages will have a huge impact on Macy’s continued operation and profit margin (Canadean).

Another possible cause of the problem is the lower inventory turnover ratio. In financial year end 2016, Macy’s announced a lower inventory turnover ratio of 3. Compared with Macy’s major competitor Target, which has an inventory turnover ratio of 6 (Wahba). Macy’s clearly needs more time to clear its inventory. Under this given inventory turnover ratio, it will take Macy’s 118 days to sale its inventory, but it’s competitor Target only needs 61 days to sale its inventory (Wahba). It’s clear that Macy’s was fallen behind in managing its inventory turnover ratio and inventory turnover days. This has caused a higher inventory carrying costs and negatively affect the company’s profit margin.

Summary

Macy’s has experienced a poor performance in it’s operation due to decline in revenue and decline in profits. Macy’s poor performance in online and holiday sales were the main causes of the decline in revenue. In addition, Macy’s huge investments and increasing labor costs are critical factor to the company’s decline in profits.

Works cited

Canadean. Macy’s, Inc. https://learn.temple.edu/bbcswebdav/pid-2256037-dt-content-rid-

12163688_1/courses/BU-BA-3103-422-3309-201726/Canad%20Report%20Macys.pdf

Kapner, Suzanne. Macy’s and Kohl’s Are Hit by Weak Holiday Sales. The Wall Street Journal. http://www.wsj.com/articles/macys-details-plans-to-close-stores-cut-10-100-jobs-1483564243

Wahba, Phil. Online Sales at Department Stores Soared in 2015, at a Huge Cost. Fortune

Magazine. Apr 01, 2016.